SYDNEY: Commonwealth Bank of Australia to take on Afterpay, PayPal in ‘buy now, pay later’ race

SYDNEY: Commonwealth Bank of Australia
became the nation’s first major lender to offer its own “buy now, pay
later” service on Wednesday, taking on US giant PayPal Inc and local
heavyweight Afterpay Ltd with the promise of lower fees.

The move sets the stage for a race – and the first shot in a price war – to
sign up shoppers and stores in a country that is home to many of the world’s
largest providers of BNPL finance after stay-at-home orders sent more people
shopping online.

Australia’s so-called Big Four banks have acknowledged the rising popularity of
BNPL which was worth A$5.6 billion ($4.3 billion) domestically in 2019, but
none had so far entered the space with their own service. The CBA launch is
planned for mid-2021, coinciding with the entry of PayPal into an Australian
market where BNPL regulation is thin and adoption is high.

“This is in line with our view that the lucrative economics of BNPL, given
its enormous success to date, will attract competition,” said UBS analysts
in a client note.

Similar to Afterpay, the CBA product involves four repayments with a A$1,000
limit and will be available alongside a product it already offers from Klarna,
a Swedish payments firm in which CBA holds a small stake.

Unlike many BNPL pureplays, however, CBA said it would charge stores only the
“standard merchant fees” that it does for credit cards. BNPL
providers like Afterpay typically charge merchants around 4%.

“The CBA product is cheaper for merchants, however merchants are willing
to accept higher fees from Afterpay as recompense for the referral traffic it
drives,” said Lachlan Hughes, CEO of Swell Investment Management, which
does not hold shares in CBA or Afterpay.

Afterpay declined to comment.

Klarna, which will see CBA offer a rival product as well as its own, said in
email that it had “a close collaboration with CBA in a highly valued
partnership over the last year and we continue to focus on the growth of that
offering”.

‘UNREGULATED’

Banks around the world have watched as BNPL took off, while the popularity of
credit cards withers. Unlike credit cards, BNPL is not bound by Australian
consumer lending laws since it does not involve interest.

By offering its own BNPL product, CBA gets to expand into an area of consumer
finance untroubled by Australia’s National Consumer Credit Protection Act,
which was strengthened in 2019 to include mandatory background checks on
cardholders.

Instead of interest, CBA plans to make money by charging late fees. A 2020
report by the Australian Securities and Investments Commission (ASIC) said BNPL
late fees industry-wide grew 38% to A$43 million in the previous financial
year. ASIC declined comment on Wednesday.

“Commonwealth Bank says its purpose is to ‘improve the financial wellbeing
of our customers and communities’ but it’s hard to see how promoting an
unregulated credit product that promotes quick consumption and debt over
savings behaviours is one that aligns with that purpose,” said Consumer
Action Law Centre CEO Gerard Brody.

CBA said it would “apply
robust criteria to approve customers based on specific eligibility and credit
assessments”.